Back in July, analysts were showing their love for Halliburton Company (NYSE:HAL). UBS Securities raised its price target from $80.00 to $87.00 based on conservative assumptions with upside potential on top of that. Almost exactly when UBS was increasing its target, Halliburton began its fall, its share price falling from $71.00 then to near $54 now.
First consider the contract risk
For comparison, Schlumberger Limited (NYSE:SLB) seems to take a longer-term contract stance than Halliburton, which reduces the risk and uncertainty. For example, in its last earnings report the company mentioned a five-year contract with BP that it won. This makes its revenue and earnings results easier to predict.
Halliburton, on the contrary, mentioned in a presentation in September that between 60% and 65% of its contracts are up for renewal for the third and fourth quarter. Halliburton was planning to pass increased current and expected future costs onto its customers, but with the energy markets in the dump that task may be more difficult.
The market may be pricing Halliburton cheaper due to concern the new terms will be unfavorable or, worse, fracking projects will start to get cancelled. According to Leonardo Maugeri, a former manager at Eni SpA, oil prices just need to be above $65 per barrel in order for the industry to be fine. Long-term, as the industry improves efficiency, even lower oil prices can still sustain a healthy business environment.
A value play?
For the fiscal year ending in December 2015, analysts expect Halliburton to earn $5.28 per share, but it doesn't look like they included the effect of stock buybacks. Exact timing and price of buybacks is unknown, so it's understandable that they left them out and made no adjustments when another $4.8 billion was authorized, but that doesn't mean we can't make the adjustments ourselves.
There is a grand total now of $6 billion authorized. You have to figure with the stock price so weak lately the company is likely putting at least some of that to work. Let's use $6 billion at an average of $60 per share (higher than current) for a total retiring of 100 million shares.
100 million less diluted shares from the 852 million at the end of last quarter reduces the count by 11.7% which serves to boost the EPS, all else equal, by 14.8%. Now let's use that $5.28 boosted by 14.8% to $6.06 as a base. That puts the forward P/E a hair under 9 based on a $54 stock price.
Is that cheap?
Let's again take a peek at Schlumberger. Like Halliburton, its share price has been in a free fall lately, along with the weak stock market in general, global economic concerns, and weak energy prices, none of which automatically mean weak fundamentals for either company.
Similar to Halliburton, Schlumberger has $7 billion of a $10 billion authorization left in its stock buyback program. Sparing you the math, this buyback at current prices should serve to boost EPS by around 6%. Analysts expect EPS of $6.73 next year so that bumps up that figure (if we use it as a base) to $7.15 per share.
This puts Schlumberger at a P/E of roughly 13 on a bit slower growth than Halliburton, compared to Halliburton's P/E of 9. That makes Halliburton the better buy, right? Well, that's not necessarily true.
Maybe Halliburton will have to give up a bit of profit margin and maybe it won't, but in the worst realistic scenario I expect profit margins will still be more than healthy. The sell-off is likely unjustified and presents an opportunity as uncertainty has caused a bargain opportunity. The time to buy is now if you can stomach the volatility.